Article Highlights:
- Who Qualifies for the Self-Employed Health Insurance Deduction?
- Self-Employed Individuals
- Partners in Partnerships
- S Corporation Shareholders
- Where is the Deduction Claimed?
- The Tax Benefit
- What Insurance Qualifies
- Limitations and Restrictions
In the maze of tax laws, the self-employed health insurance deduction stands out as a beacon of hope for self-employed persons, partners in partnerships, and S company shareholders. This deduction allows qualifying taxpayers to deduct 100% of their health insurance premiums from their gross income, resulting in a substantial tax savings. This article examines who is eligible for this deduction, the nature of qualifying insurance, and the method of claiming it.
Who Qualifies for the Self-Employed Health Insurance Deduction?
- Self-Employed Individuals - Self-employed people who record a net profit on Schedule C (Form 1040) or Schedule F (Form 1040) qualify for the self-employed health insurance deduction. This applies to freelancers, independent contractors, and small business owners who are not considered employees of another organization. The deduction is restricted to net earnings from self-employment after accounting for the self-employment tax deduction of 50% and contributions to some retirement plans (but not regular IRAs).
- Partners in Partnerships - Partners who record net profits from self-employment on Schedule K-1 (Form 1065), box 14, code A, are also eligible for this deduction. The health insurance coverage may be in the name of the partnership or the partner.
- If the partnership pays the premiums, the premium amounts must be reported on Schedule K-1, Form 1065, as guaranteed payments included in the partner's gross income.
- If a taxpayer/partner pays the premiums, and the policy is in the taxpayer/partner's name, the partnership must reimburse the taxpayer and the premium amounts will be included in gross income as guaranteed payments on Schedule K-1. Otherwise, the insurance plan won't be considered established under the business.
- S Corporation Shareholders - Shareholders who own more than 2% of a S company qualify if the firm pays their health insurance premiums, which are then reported as wages on Form W-2. The insurance may be in the name of the S company or a shareholder. If the shareholder pays the premiums and the insurance is in their name, the S company must repay the shareholder and record the premium amounts on Form W-2 as wages.
- If the S corporation pays the premiums, the premium amounts are included on Form W-2 as wages.
- If the shareholder pays the premiums, and the policy is in the shareholder's name, the S corporation must reimburse the shareholder and report the premium amounts on the W-2 as wages. Otherwise, the insurance plan won't be considered established under the business.
Where is the Deduction Claimed?
The self-employed health insurance deduction is an above-the-line deduction that directly affects the taxpayer's gross income. This advantageous location enables taxpayers to benefit from the deduction regardless of whether they itemize or claim the standard deduction. The deduction is calculated using IRS Form 7206, Self-Employed Health Insurance Deduction, which is linked to an individual's Form 1040 return. Form 7206 debuted as part of the 2023 returns. Previously, the deduction was calculated using a worksheet in the IRS instructions for Form 1040.
The Tax Benefit
The SE health insurance deduction not only allows for higher deductions and avoids the 7½% medical restriction as an itemized deduction, but it also lowers the taxpayer's AGI. The AGI is routinely used to minimize various tax breaks for high-income households. This can result in significant tax savings, making health insurance more accessible for self-employed individuals and small company owners.
What Insurance Qualifies?
To be eligible for the deduction, the insurance plan must be formed in the name of the business; however, for self-employed persons, the policy can be in either the individual's name or the name of the business. As previously stated, certain requirements involving premium payment and reporting must be completed by partners and S company shareholders.
The deduction applies to medical, dental, and long-term care insurance premiums for the taxpayer, their spouse, dependents, and children under the age of 27, regardless of whether they are dependents. Medicare payments paid voluntarily to get insurance in the individual's name, which is equivalent to qualifying private health insurance, can be used to calculate the deduction.
Limitations and Restrictions
While the self-employed health insurance deduction offers significant tax relief, there are limitations.
- The deduction is limited to the generated revenue from the firm that formed the insurance plan.
- The long-term care (LTC) insurance premium portion of the deduction is capped dependent on the age of the individual covered by the plan.
- No deduction is permitted for any month in which the taxpayer was qualified to join in a "subsidized" health plan through their or their spouse's work. The phrase "subsidized" refers to coverage for which the employer pays at least 50% of the cost.
If you have questions related to this often-overlooked tax benefit, please contact this office.
